# Assessment of Terna S.p.A. for Hybrid Bond Issuance

## Company Overview
Terna S.p.A. is Italy's electricity transmission system operator (TSO), operating under a regulated utility framework. The company is a state-owned enterprise (ultimate parent: Cassa Depositi e Prestiti S.p.A.) with essential infrastructure characteristics.

## Key Strengths Supporting Suitability

### 1. **Regulated Utility Profile with Strong Regulatory Advantage**
- Terna operates as a natural monopoly electricity transmission operator in Italy
- The business benefits from transparent, predictable regulatory frameworks typical of European TSOs
- Essential infrastructure with stable, non-cyclical cash flows
- Cost recovery mechanisms ensure ability to service debt

### 2. **Strong Financial Performance (2022)**
- Revenue: €2.90 billion (↑14.3% YoY)
- Operating profit (EBIT): €1.33 billion (↑11.1% YoY)
- Net profit: €857 million (↑8.4% YoY)
- Comprehensive income: €1.10 billion
- Consistent profitability and cash generation

### 3. **Investment Grade Profile**
- Substantial equity base: €6.17 billion (↑31% YoY)
- Strong asset base: €22.8 billion in total assets
- Equity/Total Assets: 27%, indicating solid capitalization
- EBITDA approximately €2.06 billion (based on operating income + D&A)

### 4. **Recent Hybrid Bond Issuance**
- **Critically important:** Company issued €989 million in perpetual hybrid bonds in 2022
- This represents the strongest signal of suitability per the guidance
- Hybrid bonds now appear on the balance sheet as equity instrument within capital structure
- Demonstrates successful capital markets execution and institutional investor appetite

### 5. **Leverage Metrics and Refinancing Needs**
- S&P Net Debt/EBITDA (2022): 4.35x
- FFO/Net Debt (2022): 17.24%
- Long-term borrowings: €8.42 billion
- Current portion of LT debt: €1.91 billion (refinancing need)
- Short-term borrowings: €444 million
- Total debt refinancing/maturity needs support continued capital market access
- Moody's adjusted leverage trend: **Improving** (positive signal)

### 6. **Cash Flow Generation and Capex Profile**
- Operating cash flows (2022): €2.32 billion (robust)
- Capex (2022): €1.49 billion (€212M for intangibles + €1.49B for PP&E)
- Free operating cash flow (approx.): €831 million
- Cash position increased to €2.16 billion (↑37% YoY)
- High capex needs typical of infrastructure justify hybrid financing

### 7. **Equity Capital Raising**
- Successfully incorporated €989 million hybrid bonds into equity reserve (2022)
- Demonstrated ability to execute complex capital structure transactions
- Improving financial metrics and growing equity base support rating stability

## Relevant Considerations

### Interest Rate Environment
- Swap rates increased significantly in 2022 (5Y: +209 bps, 7Y: +194 bps, 10Y: +187 bps)
- Subordinated spreads widened (Sub-Sen Delta: 229 bps vs 130 bps in 2021)
- Environment may be less favorable than 2021, but 2022 issuance demonstrates willingness to proceed

### Rating Stability
- No indication of rating downgrade triggers
- Moody's leverage trend improving supports rating outlook
- Regulated utility framework provides rating stability cushion

### Capital Structure Optimization
- Hybrid issuance in 2022 improved adjusted leverage metrics
- Allows for equity-like treatment while maintaining tax benefits
- Supports credit profile improvement trajectory

## Addressing Guidance Criteria

**Strongly Suitable indicators present:**
- ✓ Regulated utility with highly visible cash flows
- ✓ Investment grade (BBB area expected for regulated TSO)
- ✓ Recent hybrid issuance (€989M in 2022) demonstrates success and investor appetite
- ✓ Strong refinancing rationale (€2.4B annual debt maturities)
- ✓ Material improvement in adjusted leverage from hybrid issuance
- ✓ High credibility with institutional capital markets
- ✓ Improving financial metrics per Moody's
- ✓ Essential infrastructure characteristics

**Potential limitations:**
- Not deteriorating financial metrics (actually improving)
- Not approaching first call date (2022 issuance recently completed, typically has 5-6 year soft call)

## Conclusion

Terna S.p.A. is an ideal candidate for hybrid bond issuance. The company's recent successful €989 million hybrid bond issuance in 2022 is the strongest indicator that it remains suitable for further issuances. The company combines the essential characteristics of a regulated utility infrastructure operator with strong financial performance, improving leverage metrics, and demonstrated capital market credibility. The refinancing needs, capex intensity, and leverage optimization all support continued hybrid market access.

<answer>Strongly Suitable</answer>